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  • April 2017
  • Article
  • Management Science

Financing Risk and Innovation

By: Ramana Nanda and Matthew Rhodes-Kropf
  • Format:Print
  • | Pages:44
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Abstract

We provide a model of investment into new ventures that demonstrates why some places, times, and industries should be associated with a greater degree of experimentation by investors. Investors respond to financing risk―a forecast of limited future funding―by modifying their focus to finance less innovative firms. Potential shocks to the supply of capital create the need for increased upfront financing, but this protection lowers the real option value of the new venture. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value. We propose that extremely novel technologies may need "hot" financial markets to get through the initial period of discovery or diffusion.

Keywords

Risk and Uncertainty; Financing and Loans; Innovation and Invention

Citation

Nanda, Ramana, and Matthew Rhodes-Kropf. "Financing Risk and Innovation." Management Science 63, no. 4 (April 2017): 901–918.
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About The Author

Ramana Nanda

Entrepreneurial Management
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More from the Authors
  • House Prices, Home Equity and Entrepreneurship: Evidence from U.S. Census Micro Data By: Sari Pekkala Kerr, William R. Kerr and Ramana Nanda
  • Are Transformational Ideas Harder to Fund? Resource Allocation to R&D Projects at a Global Pharmaceutical Firm By: Joshua Krieger and Ramana Nanda
  • Financing Constraints, Home Equity and Selection into Entrepreneurship By: Thais Laerkholm Jensen, Søren Leth-Petersen and Ramana Nanda
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